A possible merger between Schlumberger and Smith International could find the world's largest oil field services company re-entering a business it left just a few years back and swallowing a major Houston firm in its quest to win more business with global oil companies.

But the companies remained mum Friday amid reports Schlumberger is in advanced talks to acquire Smith, with an announcement of a deal possible within days.

For Schlumberger, a deal would represent a way to fill in one of the few missing pieces — drill bits — in its vast portfolio of products and services as it pitches more all-in-one service contracts with oil company customers.

It would also give it sole ownership of a drilling fluids business it now owns jointly with Smith.

For Smith, however, it would be an acknowledgement that the gap is widening between small and midsize oil field services firms that specialize in certain niches and industry titans including Schlumberger, Halliburton, Baker Hughes and Weatherford International that nearly do it all.

“Smith would have found itself in between,” said Pierre Conner, an industry analyst with Capital One Southcorp. in New Orleans.

Schlumberger, with principal offices in Paris, Houston and The Hague, is far and away the largest supplier of products and services to oil and natural gas customers worldwide. Though business was down sharply last year, it still had more than $22 billion in annual revenue. Its next biggest competitor, Houston and Dubai-based Halliburton, posted less than $15 billion.

But Schlumberger is aggressively trying to expand what it calls its integrated project management business, which provides a bundled package of products and services, along with on-the-ground management of work, in a single turnkey contract.

Schlumberger and other major oil field services companies increasingly see such contracts as a key part of their future in a world where most of the remaining oil reserves are controlled by nations and state-owned oil companies, which often lack the technical expertise to extract them.

Back to drill bits?

Schlumberger left the drill bit business in 2002 with a $345 million cash and stock deal to sell its Reed-Hycalog unit to the former Grant Prideco. It inherited the drill bit maker as part of its 1998 acquisition of Camco International and never considered Reed-Hycalog a core asset to the company, an analyst said at the time.

But a deal with Smith, the second-largest drill bit maker behind Houston's Baker Hughes, would be a clear sign that Schlumberger wants back in. It also would give Schlumberger full control of M-I SWACO, the market leader in drilling and completion fluids, which is owned 60 percent by Smith and 40 percent by Schlumberger. Since the venture formed more than 10 years ago, there have been rumors of a Schlumberger-Smith merger.

That speculation rose in January 2009 when John Yearwood, a 25-year Schlumberger veteran, was named Smith CEO.

Even so, industry analyst Joe Hill of Tudor, Pickering, Holt & Co. Securities in Houston, finds the merger talk a little puzzling, given the premium Schlumberger would likely have to pay for Smith and limited benefits it would offer.

“There's no clear strategic imperative for Schlumberger to do this deal,” Hill said.

It's also not yet clear what effect a merger would have on operations in Houston, where Schlumberger employs roughly 5,000 and Smith had 3,781 as of early last year.

Schlumberger officials would not comment on reports of merger talks, and a Smith spokesman could not be reached for comment.

Geoff Kieburtz, analyst with Weeden & Co. in Greenwich, Conn., estimates Smith is worth $40 per share in a transaction, about 20 percent more than the company's closing stock price of $33.35 on Thursday. He said Schlumberger has cash reserves of $4.6 billion.

On Friday, Schlumberger shares fell $1.91 to $63.90, while Smith jumped $4.35 to close at $37.70 amid the merger speculation.

A string of deals

If the merger comes to pass, it would be the latest in a string of significant deals in the oil field services industry in recent years.

In September, Baker Hughes, the third-largest industry player, said it would acquire Houston-based BJ services for $5.5 billion.

That deal consolidated the two companies to create a company with more than $17 billion in annual revenue and more than 50,000 employees around the world. The merger allows Baker Hughes to add to its portfolio with pressure pumping equipment and services that are widely used in fast-growing shale gas plays and other unconventional gas formations.

In 2008, a wave of services consolidations saw the merger of six companies including Smith International with W-H Energy Services in a $3.2 billion cash and stock deal; the closing of a $7.4 billion merger of National Oilwell Varco with Grant Prideco; and the $1.4 billion acquisition of Basic Energy Services by Grey Wolf.

A Schlumberger-Smith merger could put pressure on others to make moves of their own. Kieburtz said it could even spur Halliburton to enter merger discussions with Weatherford.